The announcement of Edwards Lifesciences’ (NYSE: EW - News) third quarter fiscal 2011 results as on October 19, 2011, has led analysts to revise their estimates lower for the fourth quarter and fiscal 2011.
Third Quarter Highlights
Edwards reported an adjusted EPS of 38 cents in the third quarter of fiscal 2011, a penny below the Zacks Consensus Estimate, and missing the year-ago quarter’s adjusted EPS of 43 cents. Revenues increased 18.3% to $412.7 million, exceeding the Zacks Consensus Estimate of $405 million.
Heart Valve Therapy remained the strongest segment at Edwards with an annualized growth of 22.7% to reach $246.1 million. Sales of surgical heart valves grew 7.7% to $163.5 million and transcatheter heart valves (THV) catapulted 69.1% to book $82.6 million.
The other segments of the company, namely Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $126.7 million (annualized growth of 14.2%), $26.9 million (up 13.2%) and $13 million (down 4.4%), respectively.
Edwards tightened its revenue guidance for fiscal 2011 to $1.68−$1.72 billion (previous guidance of $1.66−$1.74 billion). The adjusted EPS guidance now stands at $1.97–$2.02 ($2.01–$2.07) while gross margin is still expected to be on the lower end of the 71–73% range. The company is also confident of generating $190−$200 million of free cash flow during the year.
Meanwhile, the company expects to report adjusted EPS of 57−62 cents in the fourth quarter of fiscal 2011, lower than the current Zacks Consensus Estimate of 63 cents. Edwards also confirmed that any change in the timeline of Sapien approval in the US would affect fourth quarter earnings.
For a full coverage on the earnings, read: Edwards a Penny Shy, Beats Sales
Agreement of Analysts
With guidance for the fourth quarter being lower than the general expectation, the majority of analysts have reduced their estimates for the upcoming quarter. Over the last 30 days, 13 of the 19 analysts covering the stock have lowered their estimates for the fourth quarter of fiscal 2011, with 2 revisions in the opposite direction. Maintaining the same trend, 18 analysts slashed their estimates with no upward revisions for fiscal year 2011, over the past 30 days.
Moreover, surgical heart valve sales during the quarter were affected by slower procedure volume and increased competition.
Current investor focus is on the potential US approval of Sapien THV for Cohort B patients (considered unfit for surgery). Although Edwards received a favorable recommendation from the FDA advisory panel, the panel expressed concerns about vulnerability to neurological problems, particularly stroke, in patients treated with Sapien. Any hiccup in the final approval of the device will be a major blow for the company.
To complicate the situation further, the Centers for Medicare & Medicaid Services (CMS), in September, decided to initiate a National Coverage Analysis (NCA) of transcatheter aortic valve replacement (TAVR). Any unfavorable reimbursement decision from CMS could have an adverse impact on the potential market of the valve.
The anticipated launch of Sapien in the US led to higher operating expenses, which coupled with unfavorable foreign exchange resulted in a 480 basis point (bps) year-over-year decline in operating margin to 14.5%.
Uncertainties like these have forced the analysts to adopt a cautious stand. Edwards is confident about the imminent US approval of Sapien and expects $20–$25 million of sales in the first quarter of launch and $150-$250 million estimated for the first full year. However, the company also noted that any change in the timeline of Sapien approval in the US would affect fourth quarter earnings.
Edwards also recorded robust growth in its Critical Care segment based on strong sales of advanced monitoring products, led by Flotrac systems and pressure monitoring products. Moreover, the company is on the verge of completing its in-hospital glucose monitoring program, a second generation product. However, some changes in design has been made, which will require a more extensive regulatory review in Europe. The company now expects CE Mark approval in the second half of 2012 compared with the prior forecast of a 2011 approval.
Magnitude of Estimate Revisions
The magnitude of estimate revisions has been significant for the fourth quarter, in the past 30 days. Overall, the consensus estimate for the upcoming quarter has gone down by 3 cents to 60 cents while the first-quarter estimate for fiscal 2012 remained unchanged at 61 cents. The estimate for fiscal 2011 witnessed a decline of 4 cents to $2.00 over the last 30 days.
Edwards recorded strong revenue growth during the reported quarter banking on robust performance of its Heart Valve Therapy products. Based on product launches in the recent past, the strong growth at Critical Care is also encouraging. Moreover, the company’s robust balance sheet enables it to target suitable acquisitions.
However, earnings during the reported quarter were affected by higher operating expenses for the anticipated launch of Sapien in the US. Moreover, any hiccup in the US regulatory pathway for Sapien will be a major dampener for the stock. In Europe, Edwards operates in a highly competitive environment with the strong presence of Medtronic (NYSE: MDT - News). Moreover, Boston Scientific (NYSE: BSX - News) is also working to enter the THV market banking on the acquisition of Sadra Medical.
We currently have a Neutral recommendation on Edwards, which corresponds to a Zacks #3 Rank (Hold) in the short term. However, any adverse decision regarding Sapien would lead us to revise our estimates for the forthcoming period. Both Medtronic and Boston Scientific carry Neutral recommendations.
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